Budgeting, no doubt, is fundamental to anyone who wants to pay debt faster, to live debt-free, and to feel more financially secure about the future, especially for retirement.
Zero Based Budgeting is one of the most common methods of budgeting.
What is Zero Based Budgeting?
Zero Based Budgeting (ZBB), as the name suggests, uses zero in the end. It’s a budgeting method where the balance of income less savings and spendings equals zero.
This means knowing exactly where every single cent goes, as well as avoiding spending more than the income, which is of course, is always possible when credit cards and personal loans are easily accessible.
This also means spending the ‘left over’ of your income wisely. For instance, if after allocating all your expenses you still have around $100 left, you’ll need to do something with $100, either use it for investments or put it in the emergency fund account.
Examples of Zero Based Budgeting
Zero Based Budgeting – Monthly
| Income | $3,000.00 |
| Savings / Investments | $500.00 |
| Debt repayment | $500.00 |
| Emergency Fund | $500.00 |
| Rent | $800.00 |
| Electricity | $50.00 |
| Water | $30.00 |
| Groceries | $150.00 |
| Transportation | $152.00 |
| Medical | $138.00 |
| Social | $100.00 |
| Clothing, hair treatment, etc | $80.00 |
| Total Expenses | $3,000.00 |
| Balance | $0.00 |
How to Budget with Zero Based Budgeting
Assuming you haven’t done any ZBB, here are the steps:
1. Know Exactly How Much You Earn
This is the starting and the most important point of all types of budgeting. Without knowing exactly how much you earn, worsened by easily accessible credit cards, piling debts and struggling to pay the debts are likely to happen.
2. Decide on Your Financial Goal
We all want a secure retirement for sure. But how do we achieve that if we are still paying a mortgage and other debts? This means prioritising debt repayments as the first step and then prioritising on savings/investments as soon as possible.
3. Build Categories for Your Budget
Ideally, the 13 must-have categories, such as savings, housing, utilities, food, and medicals, should be included in your budget so the spendings are easily identifiable. When spendings are identifiable, forecasting becomes more feasible. Read the 13 must-have categories for further details.
4. Track Your Spending for at Least Two Months
When you track your spendings for at least two months, you’ll get familiar with how much you spend on what. You can even start strategising which expenses you need to cut back or eliminate altogether. Here are 5 best free apps to help you track your spending.
5. Distinguish Between Fixed and Variable Expenses
Fixed expenses are those that cost the same each week, month or year. Some examples are mortgages, rent, car repayment, certain taxes, certain insurance, internet charges, mobile/cell phone plan, Netflix and food.
Variable expenses are those that vary depending on how you use the products/services. Things like electricity, water, takeaway coffee, going to concerts, and eating out in a restaurant, are variable expenses. They increase and decrease depending on your usage.
Distinguishing between those two is essential to allocate the spending limit and therefore, build a more accurate plan.
6. Include Your Annual Spending
Those who have never done any budgeting often forget to include the annual spending in their budget. Here in Australia, for example, car insurance, car registration, and health insurance are usually paid upfront annually. With this in mind, the spending should ideally be distributed evenly throughout the months that year. For example, if car insurance costs $720 per annum, then the amount included in the monthly budget would be $720/12 = $60.
The Benefits of Zero Based Budgeting
The most recognisable benefit of ZBB is that it provides a clear understanding of how the money flows in and out. When a clear understanding has been established, a more manageable allocation in spending can take place. This is total control of your money, which leads to financial freedom.
The Challenges of Zero Based Budgeting
Time Consuming as you need to start tracking all your spending.
Difficult to forecast: forecasting (and limiting) some variable expenses can be challenging, especially if the service is under a post-paid plan, like electricity, for instance.
Further Tips
Now that you know about Zero Based Budgeting, try your best to stick with it. Here is a post about “How to Stick to Your Budget: 10 Tips”.
Conclusion
Zero Based Budgeting is a budgeting method where the balance of income less savings and spendings equals zero. This means knowing where all your money goes after working out how much you earn.
Even though there are challenges in Zero Based Budgeting, when done correctly, this budgeting method can lead to financial freedom.
